Reports& surveys

Despite a challenging economic climate, the entrepreneurial independent TV production sector is continuing to grow. Tim Dams reports on the findings of Televisual’s 2012 Production 100 survey

The UK economy may be in recession this year, but not so the independent production sector.

The TV business, say most producers, is as tough and competitive as ever to work in. Budgets are continuing to fall, costs are rising, margins are being squeezed, cash flow is a problem and many say the market is more crowded than before.
But, the majority of indies taking part in the Production 100 say their companies have grown over the past 12 months, and report a busy year in terms of new commissions.

The feedback builds on the cautious optimism that was apparent in last year’s survey, which revealed a distinct lifting in the mood among indies after the intense difficulties and belt-tightening of the 2008-10 downturn.

The figures back up the sentiment, revealing the upward trajectory of indie revenues over the past three years. The top 100 indies turned over £2.1bn from the UK market in 2011-12, up from last year’s £1.9bn and £1.75bn the year before. Full time staffing levels are up as well, reaching a combined 7,405 this year against 7,255 last year – all supported, of course, by tens of thousands of freelance production staff.

Significantly, several indies say that one of their biggest challenges is simply retaining and recruiting good and experienced staff, particularly series producers and production managers, in the face of stiff competition in a busy market.

Indies also seem to be looking to the future with more confidence than before. Only 13% think that business will be worse next year, while 36% say it will be better and 51% believe it will stay the same.

Producers give many reasons for their renewed sense of (cautious) confidence. In particular, they point to a broader customer base to pitch in to – beyond the usual suspects of the BBC, ITV and C4.

Many report that Channel 4 is, as it promised last year, commissioning from a wider range of indies and not just the same superindie suppliers. “The desire to commission from “true indies”, especially at Channel 4 is apparent,” says Keo Films’ finance director Simon Huntley.

But it’s the arrival of Sky as a commissioner of real scale that has boosted the fortunes of many indies. “The emergence of Sky as a major player in the market has been a key factor in maintaining and now boosting our production levels,” says Baby Cow’s finance director Jonathan Merrell.

In particular, drama and comedy producers, like Hartswood Films, Hat Trick, Kudos and Kindle, pick out the impact that Sky having on the market

Sky has “increased opportunities and created a more competitive marketplace for popular content,” says Hat Trick’s director of operations Kate Wilson.

US broadcasters – nobably Discovery and Nat Geo – are also spending more with British production companies, say other indies. “Our area of factual programming is going through a boom with Discovery and Nat Geo commissioning more from London,” reports Windfall Films’ head of production Birte Pedersen.

Indeed, the international interest in British content, notably from the US, has provided a vital fillip to indies at a time of falling budgets here. Indies are winning commissions direct from international broadcasters, as well as selling a greater number of finished programmes and formats to international buyers. Production 100 indies make, on average, 12% of their revenues from selling the rights to their programmes.

Many producers, faced with the downturn of 2008-10, were forced to diversify out of the UK, seeking new customers abroad. That strategy, it seems, is now paying dividends and offers many producers exciting opportunities for growth.

“The UK commissioning environment has remained slow, appetite for risk is low and budgets are under pressure, but the US market has remained robust and keen for new ideas,” says Argonon’s chief financial officer Stuart Mullin. (See Outlook for 2013, page 25).

Continuing with the positives, others point to the emergence of new revenue streams finally coming on tap. Twofour says there has been noticeable upturn in commissioning across the board, adding that ad funder Group M has “played a significant role in the financing of new series.”

Meanwhile, Big Talk’s finance director Sharon Martin says that digital income is “finally beginning” to become a reality – although plenty of indies also report that they are still struggling with how best to monetise new media. Figures from the Production 100 show that indies make 3% of their total revenues from new media.

Drama and animation producers are also upbeat about the forthcoming arrival of tax breaks for their sector. “Business prospects look good for the next 12 months,” says Neal Street Productions head of film and TV Pippa Harris, who says the proposed tax breaks for high-end drama “should give a real boost to our industry.” “The tax credit is a real opportunity for us, and we can see real positivity in the industry returning,” adds Oli Hyatt, md of animation outfit Blue Zoo.

Money Troubles
For all the positivity, though, the challenges of being an indie remain considerable. And money seems to be at the heart of most of these challenges.

Financially, indies are facing multiple pressure points. Firstly, programme budgets have continued to fall over the past year. 60% of indies reported that budgets had declined in the past six months, while 31% said they had remained the same. Only 9% thought budgets had risen.

Reef’s director of production Paul Hanrahan speaks for many when he says: “The last twelve months has seen an increase in commissions across the industry, which is a plus, but terms and deals are being tightened up dramatically, which is a minus. Costs of staff, facilities and overheads are continuing to go up, but budgets are taking a 1-2% tumble series on series.”

Falling budgets mean that indies are struggling to maintain their margins on production. “With tariffs being at best flat, margins are always under pressure,” says Steve Nam, chief operating officer of Dragonfly Film and Television. Spun Gold’s director of finance Simon Gray adds, “Margins continue to be squeezed as broadcaster tariffs fall while costs of production are static or rising.”

The comments back up findings from Pact’s most recent census of the indie sector, which reported that overall profitability at indies weakened last year. Production companies across most parts of the industry reported declining net margins at 6.7% in 2011, down from 13% in 2010.

Yet despite budgets continuing to fall, indies say that broadcasters still want to see the same quality on the screen. The Garden’s chief executive Nick Curwin says that one of his big challenges is “dealing with increased pressure from broadcasters who want more for less – and want it now.”

It’s a point echoed by many producers. Modern TV director Clare Byrne comments: “Broadcasters have such a vast range of brilliant ideas presented to them from the many talented independent producers in the UK that they are spoiled for choice and consequently can demand production values and content that are completely unachievable within the tariff that they are prepared to offer.”

Mammoth Screen’s director of production and finance Jon Williams says it’s a real challenge “controlling broadcaster expectations for the licence fees they are willing to pay – both during the commission and production stages.”

Others simply point out that broadcaster tariffs aren’t reflective of the content they are commissioning. “Underfunding continues to be a huge business burden especially when the shared creative and editorial ambition remains high, but the channels expectation is that you can make a series for less money,” says Colette Foster, md of Remarkable Television.

The budget cuts are creating all sorts of problems during production, from reduced (and more pressurised) filming and edit schedules to less money being available to pay experienced production professionals (whose rates have come under severe pressure in recent years). The danger of overspends on production in the face of high editorial demands is very real for many indies, requiring even tighter management of budgets.

It also means that producers are increasingly having to seek other forms of gap funding to plug the holes in budgets such as distribution advances, co-production income and sponsorship.

“Programmes that broadcasters would have fully funded a year or two ago now require multiple co-production partners,” reports Tigress Productions md Dick Colthurst.

This is also eating into the time that indies might have spent actually making programmes. “Finance raising seems to take more time and effort than actually making the films,” says Bungalow Town director Jez Lewis.

“It takes a lot more work to make the same money,” says Wide Eyed Entertainment chief executive Jasper James. “Deals are more complicated and more effort goes into developing ideas.”

And it means that many indies have to surrender their rights to programmes just to raise the finance to get them made. “Gap funding productions is becoming a greater issue,” says Rondo chief executive Gareth Williams. “Several companies seem to be gap-funding using financial sources such as grants, external investors and distribution advances. It’s becoming increasingly difficult to make any profits on the back end, other than on huge formats.”

Indeed, the struggle to hang on to programme rights is becoming a major issue for indies. Many report that broadcasters are moving away from the Terms of Trade. At the very least, aggressive deal terms are leaving indies with less back end. Indies like Lambent Productions, for example, say that a key challenge is securing commissions with IP, while Twofour says that “commercially aggressive broadcasters” are compromising their rights position, and Tigress adds that broadcasters are “demanding all rights for tight budgets.”

Spun Gold’s director of finance Simon Gray comments: “Broadcasters are seeking greater rights to encompass new media and methods of delivery without any increase in tariff while third party rights holders and on-screen talent seek to restrict these or insist on additional payments.”

As if the struggle to hold on to rights, deal with falling budgets and find extra funding for shows wasn’t enough, indies also flag up another major dilemma this year – cash flow problems.

Producers say broadcasters are increasingly paying late for programmes. Cash flow is an issue brought up by countless indies as one of their biggest challenges to face their business. “Cashflow is a recurring problem for any business our size,” says Rebecca Notman-Watt, director of operations at Back2Back Productions.

A competitive market
Funding aside, the key priority of all indies is to win commissions to build their businesses.
And for many, the Holy Grail of indie business is to win a returning series that gives a company a degree of business security and allows them to invest in staff and kit.

For example, the ambition of ClearStory, says executive producer Russell Barnes, is, “to grow successfully from a very small boutique documentary production company into a medium-sized indie capable of delivering returning series and features formats.”

It’s crucial, adds Alexandra Kallis, business and development manager at CPL Productions, “to develop formats with more potential for ancillary and overseas sales” and “to invest in developing formats in other genres to reduce risk.”
The problem is that this is the goal of nearly every single producer – and there is a real feeling that competition is as intense as it has ever been for this kind of business.

One of the most successful producers of formats, Dragonfly, feels this acutely. Steve Nam says a priority is “maintaining and stabilising recent growth in a business environment that is generally uncertain and arguably saturated.” Thumbs Up head of development TJ Sherbrooke says that business is “not bad at all.” But he, points out, “the indie sector seems to be increasingly crowded.”

Certainly, in the drama and comedy sector there have been a spate of companies that have successfully diversified from the volatile film industry into the more predictable and financially secure TV market, like Big Talk, Ruby Films, Neal Street and Warp Films.

Meanwhile, many report the time-old complaint that superindies continue to dominate the market, providing massive competition for smaller and mid-sized companies. “It’s a struggle to compete against the superindies who essentially are extremely successful at developing returnable formats,” remarks Modern TV’s Clare Byrne. It’s a sentiment shared by other smaller indies such as Telesgop, First Look and Reef Television. Splash Media’s finance and commercial director Clare Nicholls says: “There are advantages in being a standalone indie, but they’re weighed against competing with very well resourced superindies.”

However, there is evidence that key broadcasters like the BBC and notably Channel 4 are ordering shows from a wider range of indies, a point echoed by the statistics emanating from the BBC WOCC figures and Pact’s recent industry census. “This means that the pressure to be under the umbrella of a superindie has diminished to a degree,” says Keo Films’s Simon Huntley.

The flipside of benefiting from a growing number of commissions is that many companies also have to fight harder for good staff. Broadcaster appetite for bigger, more stand out shows means that there is greater demand for highly skilled, experienced production execs to run them. Many of the big fixed rig factual shows, like 24 Hours in A&E and One Born Every Minute, for example, employ huge numbers of production staff and require seasoned managers to run them. And there is a feeling that there are not enough senior level, well-trained staff to go around at the moment.

Icon Films md Laura Marshall, for example, cites “attracting the right calibre of creative staff” as a key challenge, as does Remarkable Television’s Colette Foster. “We’re busy. It’s hard to find good staff, which must mean that everyone is busy,” Foster comments. Twofour says that “attracting and retaining the very best production staff in the face of increasing competition is a key objective.”

And, it seems, broadcasters are not making the life of indies any easier. There are familiar complaints about the time it takes for broadcasters to make decisions and to commission shows.

“It remains fairly tough as broadcasters take longer to make decisions,” says Love Productions creative director Richard McKerrow. Silver River md Samantha Lawrence also points to “delays on decision making” at broadcasters. This of course, can have a significant impact on the bottom line of production companies. “Commissioning timetables do not take company cash flows into consideration. It simply takes to long to win a commission,” says Matchlight md David Smith.

A few indies, like Betty CEO Liz Warner, say that commissioners are now starting to take more creative risks and are buying outside the predictable.

And indies can take heart from the fact that there are now many more places to take their ideas than ever before, beyond the usual suspects of the BBC, ITV and Channel 4.

Crucially, indies realise that if they can get an idea away in the UK, then they have the chance to exploit it around the world for themselves. For all its difficulties, the UK remains perhaps the best springboard for taking a show into international markets. “The UK remains the premier territory to launch new TV ideas and for that we are grateful,” says Gogglebox md Mat Steiner.